Speculating on home improvements

Hyun-Soo Choi, Harrison Hong and Jose Scheinkman

Journal of Financial Economics, 2014, vol. 111, issue 3, 609-624

Abstract: We develop a speculation-based theory of home improvements. Housing services are produced from a mix of land and structures. Homeowners optimistic about future prices for these services speculate by making improvements, which we model as them increasing their structures holding fixed their land. The recoup value (the difference between the resale value of improvements and construction costs) is simultaneously increasing in home price appreciation and falls with construction cost growth. This prediction stands in contrast to a consumption-cum-financial constraints motive in which rising home prices loosen financial constraints and lead to lower recoup values. We provide evidence consistent with a speculative motive using data on the costs and recoup values of remodeling projects across US cities.

Keywords: Speculation; Home improvements; Real estate; Remodeling (search for similar items in EconPapers)
JEL-codes: G11 R21 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Working Paper: Speculating on Home Improvements (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:111:y:2014:i:3:p:609-624

DOI: 10.1016/j.jfineco.2013.11.011

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